Little to fear but fear itself

Slowing demand for raw materials will not derail African economies

AFRICA has done well out of China’s economic rise. Twenty years ago its exports to China were negligible. Today China is Africa’s biggest trading partner. Around $200 billion-worth of goods moved between the two last year and almost all the stuff shipped from Africa was raw materials. A commodities boom has helped Africa’s GDP to grow by 5.5% a year in the past decade.

Now China’s economy is slowing and its priorities are shifting from resource-heavy capital spending to a more refined, consumer-led sort of growth. At the same time GDP in Brazil and India is growing much less quickly. Together, the three emerging-market giants buy a quarter of Africa’s exports. Already shipments of raw materials command a lower price than they used to. The Economist’s commodity-price index was 14% lower in August than a year earlier and is well below its peak of February 2011 (though it is still more than twice its level of a decade ago). Africa would be lucky if all this does not put a dent in its impressive GDP growth. Might it even be crushed?

Commodities play a big role in the economies of around half of sub-Saharan Africa’s 45 countries. They account for at least a quarter of total exports in 20 of them, including Angola, Nigeria and South Africa, the three largest economies. A drop in demand, and hence price, has the potential to send a shock across the continent, not least since commodities also affect GDP indirectly, as the value of future output is marked up or down with price changes. New mines become less attractive when markets drop, so capital spending falls. Royalties and mining taxes accruing to the state tail off. Public spending would have to be cut.

Yet the impact of China’s slowdown on Africa will take a while to be felt fully. The direct effect on mining output is likely to be small. Operations are expensive to set up and it only makes sense to stop digging if prices fall below variable costs. That is unlikely except in some mature mines. Investment projects already under way should be substantial enough to stop African GDP growth from collapsing.

Nor does a general squeeze on public spending look imminent. Low public debt and improved fiscal management have brought many African countries access to private credit, says Charlie Robertson of Renaissance Capital, an investment bank. Furthermore, seven of the ten countries in sub-Saharan Africa that rely on resources for more than a fifth of tax revenue are exporters of oil (see chart). In contrast to most other commodities, the price of oil has remained fairly strong. A shift in the Chinese economy toward consumer spending is likely to boost demand for crude oil and liquefied gas. The handful of African states that rely on receipts from copper and iron-ore mines have more to worry about. The cooling in China’s investment boom will thus be trickiest to manage in Congo, Guinea and perhaps Zambia.

Still, China’s slowdown and structural change may also be an opportunity for Africa. State-backed Chinese firms are increasingly keen to make a better return, which may persuade more of them to look outside their home market for profitable investments. Africa is an obvious destination, given the relative lack of competition. Chinese construction firms, long visible in Africa, will increasingly be joined by companies from other industries such as steel, says Martyn Davies of Frontier Advisory, a research firm based in Johannesburg.

Africa is now more often seen by Chinese firms as a place to do business other than digging stuff out of the ground. An IMF study in 2011 found that only 29% of Chinese foreign direct investment in Africa was in mining. If anything, official figures understate the extent of Chinese non-commodity investment, as they rarely include smaller firms in wholesale trading, retail, catering and textiles.

A growing number of firms want to be close to Africa’s fast-growing consumer class (see article). Many are also lured by trade pacts, such as the African Growth and Opportunity Act, which gives African-based firms preferential access to American markets. German car producers have been lured to South Africa, American textile firms to Ethiopia and Korean laptop and Japanese motorcycle makers to Kenya. China may see a chance to transplant some low-value-added industries, such as textiles, to Africa in the hope of escaping labour-cost increases at home and to find easier export routes to America. But competition is fierce from other frontier markets in Asia, such as Pakistan, Bangladesh and Vietnam.